Moody’s said it expects the bank to receive support from the government in times of need but warned against the lender’s high exposure in the manufacturing sector.

“The affirmation of BDO’s Baa2 deposit and senior unsecured debt rating is based on the bank’s BCA of baa2, and Moody’s expectation that there is a very high probability of the bank receiving systemic support from the Philippine government (Baa2 stable) in times of need,” Moody’s said in a statement on Wednesday.

“However, the ratings do not receive an uplift, because they are already at the same level as the sovereign’s rating,” it added.

It said the January 2017 rights issue of P60 billion has significantly strengthened the BDO’s capital position, bringing the reported common equity tier 1 (CET1) ratio to 14 percent at end-March 2017 versus 10.7 percent at end-2016, and will provide a strong loss absorbing buffer, even after incorporating Moody’s 15 percent to 20 percent growth expectations over the next 12 to 18 months.

The bank’s CET1 ratio is expected to exceed 12.5 percent at end-2018, and higher than the 11 percent that Moody’s expects BDO will be required to maintain as the minimum Basel III capital requirement, after taking into account the buffer for domestic systemically important banks, which will be fully implemented by January 2019.
Moody’s also expects the bank’s asset quality profile will remain stable over the next 12 to 18 months.

“Robust economic conditions will support bank borrowers and asset quality in the banking system. Stable asset quality is also supported by the bank’s diverse loan portfolio, as well as low leverage in the economy,” it said.

Risks

However, the debt watcher noted: “BDO’s high concentration to conglomerate groups in the manufacturing sector could expose the bank to single name delinquencies; a latent risk in the system which affects all rated-Philippine banks.”

At end-March, the bank’s nonperforming loan ratio (NPL) was largely stable at 1.3 percent from 1.2 percent for 2016, and its loan loss coverage—as measured by its loan loss allowances to gross NPLs—was a high 138 percent from 146 percent for 2016.

Based on Moody expectations, the regulatory changes on asset recognition as well as IFRS9 — which will be implemented from January 2018 — could push up the reported NPL ratio, it said.

IFRS 9 or International Financial Reporting Standards (IFRS) are a set of international accounting standards stating how particular types of transactions and other events should be reported in financial statements.

Despite the changes in reporting norms, the credit watchdog expects that the bank’s underlying asset quality will stay broadly stable.

“The bank benefits from a strong funding and liquidity position. As the largest bank in the country, with a market share of 22 percent and 18 percent of total system loans and deposits at end-March 2017, BDO’s market position will likely remain defensible,” it added.